It’s All Greek to Investors

February
23

Written by: Jon McGraw

Things weren’t looking so good for Greece on Thursday. Barron’s explained:

“… Germany scotched Greece’s request for a six-month extension to its existing aid package. Athens had sought more time to renegotiate the Draconian austerity package imposed on the land of Pericles, to keep from going bust and, perhaps, being kicked out of the eurozone.”

A day later, however, eurozone leaders found grounds for compromise, and Greece became the beneficiary of a four-month extension to its current aid package. The deal was contingent on Greece coming up with a list of economic reforms by today for European leaders to approve.

The Irish Times reported Greek Prime Minister Alexis Tsipras gave the conditional agreement an interesting spin, telling Greek citizens, “Yesterday’s agreement with the Eurogroup … cancels the commitments of the previous government for cuts to wages and pensions, for firings in the public sector, for VAT rises on food, medicine.” After all, it’s what Tsipras promised during his campaign election.

The Global Market Reacts

World markets were categorically thrilled with the news. In the United States, the Dow Jones Industrial Average and Standard & Poor’s 500 Index both closed at record highs. Markets across Europe and Asia finished the week even higher. The only stock markets reported in Barron’s International Perspective to not have finished the week higher were in Taiwan and Canada.

Closer to home, the Federal Reserve’s Open Market Committee minutes indicated to some that rate hikes may not begin in June, as originally anticipated. However, Reuters pointed out that employment data has been very strong since the January 28 meeting and could affect the Fed’s decision about when to tighten.

Data as of 2/20/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.6% 2.5% 14.7% 15.7% 13.8% 6.0%
10-Year Treasury Note (Yield Only) 2.1 NA 2.8 2.1 3.8 4.3
Gold (Per Ounce) -2.0 0.8 -8.2 -11.3 1.6 11.0
Bloomberg Commodity Index -1.7 -1.5 -23.0 -11.4 -5.2 -3.9
DJ Equity All REIT Total Return Index -0.5 4.2 24.8 15.7 17.8 9.4

And, Now, for Something Completely Different

You learned about negative numbers in school; now you get to learn about negative interest rates. Currently, the European Central Bank (ECB) pays -0.2 percent on money banks have deposited. By way of comparison, the U.S. Federal Reserve’s Fed funds rate is 0.12 percent.

The idea of negative interest rates—essentially paying a company or an institution to hold and use your money—is confounding. Why wouldn’t you opt for cash instead? Richard Anderson and Yang Liu of the St. Louis Fed explained:

“Negative interest rates fascinate both professional economists and the public. Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments. Currency does not provide even a logical zero floor for market interest rates.”

According to The Economist, banks in the United States and Europe have significant amounts of cash tucked away within their central banks, thanks to quantitative easing. By paying a negative rate of return, central banks are encouraging member banks to reduce reserves through lending with the idea of stimulating economic growth. The catch is that borrowers may be in short supply when economic prospects for new businesses are murky.

One unexpected consequence of negative interest rates is that some financial firms’ computer systems have had to be reprogrammed since they weren’t set up for negative rates.

Weekly Fun—Think About It

“Do you want to know who you are? Don’t ask. Act! Action will delineate and define you.”

—Thomas Jefferson, Third U.S. President